The Chuck Hagel Surge

Nebraska senator Chuck Hagel burst onto the national scene this week as the leading critic of President Bush’s “surge” plan for Iraq. After his widely reported speech at a Senate Foreign Relations Committee hearing, he’s become a hot topic in the blogosphere.

His possible presidential candidacy made the front page of the Washington Post today, and he got a love note from Peggy Noonan at opinionjournal.com (probably to be printed in Saturday’s Wall Street Journal). The Post says, “He is reviled by his party’s conservative base.”

Yes, right now the only thing conservatives know about him is his opposition to George W. Bush’s war plans, and conservatives are still inexplicably in thrall to the big-government Bush. But I’ll predict that over, say, the next 12 months leading up to the Iowa caucuses, Hagel is going to look increasingly wise and prescient to Republican voters. And as they come to discover that he’s a commonsense Midwestern conservative who opposed many of the Bush administration’s worst ideas, he’s going to look more attractive.

To see what all the fuss is about, click here.

Taylor vs. Woolsey this Sunday on Foreign Oil

This Sunday, I’ll be debating former CIA chief James Woolsey at a “conservative summit” in Washington, D.C., sponsored by the National Review. The topic: “Resolved: That the federal government should act to reduce America’s dependence on foreign oil.” James Woolsey, of course, will take the affirmative. 

Unfortunately, it seems as if there’s no room for new attendees, so if you’re not already registered for this weekend confab, you probably can’t get in. There is a good chance, however, that the debate will air live on C-SPAN (either I or II). So if you’ve got nothing better to do at 10:30 am EST Sunday, you might want to tune in.

The last time I tangled with Woolsey directly, it was during a hearing of the House Armed Services Committee in July 2005. Both he and I were part of a four-member panel to testify about the Chinese National Oil Company (CNOOC) bid to buy a controlling interest in UNOCAL. Woolsey argued that the merger was the first shot of WWIII. I argued that it’s no business of ours whether UNOCAL stockholders sell their shares to CNOOC and that it’s no skin off America’s nose one way or the other. For those who missed the resulting fireworks, let me just say that I tore him apart and did so in grand style. I fully expect to do so again this weekend.

Each of us will have five minutes at the NR event to state our case. That’s a tall order. There is a lot that can be said — and has been said — about the alleged evils of foreign oil. Rather than get too deep into the policy weeds (that can wait until the Q&A), I think I’ll use the few minutes I have at the start to say something like the following:

The case for importing oil is the same as the case for importing, say, computer chips. If it’s cheaper to buy something from abroad than to produce it here at home, then the economy in general — and consumers in particular — are made wealthier by imports. Governmental interventions to discourage energy imports are, by definition, government interventions to discourage the use of cheap energy.

Mr. Woolsey contends that the government must act because foreign oil supplies are increasingly subject to disruption. True enough. But that’s why market actors are busily stockpiling oil in private inventories. They are saving oil for a rainy day in the hopes of making a profit if and when that disruption occurs. Private investors are also sinking increasingly large sums of money into oil futures in order to hedge against other investment bets and to diversify equity-heavy portfolios. This has further increased the stock of oil held off the market for future use. 

Many petroleum analysts, such as Philip Verleger and William Brown, think that private inventory buildup and the surge of dollars into oil futures markets is responsible for a large part of today’s price. How large is unclear, but Brown thinks that oil would sell for around $27 a barrel today were this not going on. Think of this as an oil tax — imposed by the market itself — to account, in part, for the possibility of future supply disruptions. In short, what makes James Woolsey think that the market isn’t already hedging sufficiently against the possibility of import disruptions?

And let’s not forget that a supply disruption anywhere in the world will increase the price of crude oil everywhere in the world. Accordingly, even if we imported zero oil, we would still be just as economically vulnerable to a terrorist attack on Saudi oil-producing facilities as we are at present.

Mr. Woolsey’s argument that dollars spent on oil imports funds Islamic extremism is only partially true. Oil revenues in the Middle East are established by global supply and demand, so even if the U.S. spent no money on Persian Gulf oil, producers would see the same revenue coming in the door — all things being equal. 

Regardless, there is no correlation between oil profits and Islamic terrorism. A thorough examination of oil prices from 1983 to present compared with data concerning Islamic terrorist attacks (both in frequency and in body counts) reveals no relationship between the two whatsoever. We’ll soon be publishing the regression analysis to prove it.

In sum, foreign oil is cheap oil. Market actors have every incentive to take the risks of supply disruption into account when they buy products from abroad. Consumers can hedge against these risks, if they are so interested, in any number of ways. Government has no business doing for us what we can do for ourselves. Conservatives have no business embracing government dictates about what oil companies can buy and sell absent Mr. Woolsey’s consent.

I probably can’t pack all that into a five-minute opening statement, but we’ll see.

Gruber & Simon: Crowd-out Is Clearly Significant

Have you checked your inbox for this week’s summary of the latest working papers from the National Bureau of Economic Research? 

If not, you might have missed the latest from Jonathan Gruber and Kosali Simon about how expanding government health programs reduces private health insurance coverage. Here’s the abstract:

The continued interest in public insurance expansions as a means of covering the uninsured highlights the importance of estimates of “crowd-out,” or the extent to which such expansions reduce private insurance coverage. Ten years ago, Cutler and Gruber (1996) suggested that such crowd-out might be quite large, but much subsequent research has questioned this conclusion. We revisit this issue by using improved data and incorporating the research approaches that have led to varying estimates. We focus in particular on the public insurance expansions of the 1996–2002 period. Our results clearly show that crowd-out is significant; the central tendency in our results is a crowd-out rate of about 60%…. We also find that recent anti-crowd-out provisions in public expansions may have had the opposite effect, lowering take-up by the uninsured faster than they lower crowd-out of private insurance.

In other words, for every 10 people added to the Medicaid rolls, the number of people with private health insurance falls by six.

And just in time for the debate over SCHIP reauthorization.

Frankenstein’s Monster

For a guy who claims to know little about health care, Brad DeLong gives an excellent summary of the health care reform debate. DeLong accurately represents two sides of the debate, which means that he reveals (in my view, anyway) a flaw in the Left’s reasoning.

ADVERSE SELECTION   DeLong writes:

Those economists on the left tend to think that the real big problem with American health care is adverse selection: Those who know they are healthy and likely to stay that way skimp on purchasing insurance. Insurance companies work like dogs to avoid selling insurance to people who are expensively sick or likely to get expensively sick. As a result, a huge amount of people’s work-time and information technology processing power are wasted on the negative-sum game of trying to pass the hot potato of paying for the care of the sick to somebody else. The more people separate themselves or are separated into smaller and smaller pools with calculably different exposures to risk, the worse this problem gets.

THE RISING COST OF CHRONIC ILLNESS   DeLong further writes:

[A]n increasing share of the increase in health care costs is going to be driven … by expensive chronic diseases and risk factors driven by long-term lifestyle choices. Nationalizing the health insurance sector won’t diminish the costs in 2050 of treating the lung cancer that the twenty-year-old starting smoking today will develop. Increasing copays won’t reduce the costs of treating the diabetes that the five-year-old today with a two-Coke and three-Twinkie-a-day habit will develop in 2045.

So here’s where I see the flaw. 

  1. Adverse selection only becomes a problem when insurers do not adjust premiums according to the enrollee’s expected medical expenses — i.e., according to risk. If insurers set premiums according to risk, they have no reason to avoid sick people; the insurer is indifferent between high-risk and low-risk individuals. Where insurers do not set premiums according to risk, it is usually because of an express or implicit government prohibition.

    Many states prohibit risk-based premiums in the individual insurance market. Premiums for employer-sponsored coverage also do not vary according to individual risk, a system that is propped up by an enormous tax preference for such coverage. The Left generally likes these government interventions, which makes adverse selection their very own Frankenstein’s Monster — not some inherent market failure. Allowing risk-based premiums in these areas would make adverse selection effectively disappear.

  2. Moreover, risk-based premiums encourage healthy behaviors (e.g., quitting smoking) and encourage people to purchase health insurance while they are still healthy. In contrast, prohibiting risk-based premiums encourages lung cancer, diabetes, and uninsurance. (Why buy coverage when I’m healthy if there’s no penalty for waiting until I have lung cancer?) Therefore, allowing risk-based premiums would help reduce the costs of behavior-induced chronic diseases about which DeLong frets. If smokers or the obese have to pay more for their health insurance, there will be fewer smokers and obese people — and those who remain will have largely paid their way.

The Left will object that risk-based premiums would mean that insurers would no longer over-charge healthy people in order to subsidize the sick, who then may not be able to obtain coverage. But those forced subsidies are coming to an end anyway, simply because people will always pursue their self-interest. One of the reasons that employment-based coverage is unraveling is that the healthy people realize they’re being ripped off and they want out.

For what it’s worth, I think DeLong accurately describes the regrettable “prescription of the right-wing subtribe of economists … [to] regulate the insurance market so that the only policies allowable are high-deductible.”

The Ethanol Con

The pitch to reduce American gasoline consumption by 20 percent over the next 10 years was one of the highlights (or, make that, lowlights) of the president’s State of the Union Address last Tuesday night. The president hopes that three quarters of that goal will be met by that old political standby — corn.

Yesterday, the Orange County Register ran an op-ed I wrote that debunks the claims that:

  • ethanol will lead to energy independence;
  • ethanol is economically competitive now;
  • ethanol reduces gasoline prices;
  • ethanol is a renewable fuel;
  • ethanol reduces air pollution;
  • ethanol reduces greenhouse gas emissions;
  • ethanol subsidies are necessary to “level the playing field”; and
  • cellulosic ethanol is a promising economic bet.

Since I wrote that, however, even more devastating research has come to light. On the issue of global warming, a PhD student at MIT just issued a paper through MIT’s Laboratory for Energy and the Environment demonstrating that, on a life-cycle basis, ethanol and gasoline emit about the same amount of greenhouse gases. Increasing ethanol production, however, will tilt the greenhouse gas balance against ethanol because the only way to get more corn production is to seed more land with corn. That new cropland will be, on balance, less productive than the land already being used for corn, so land harnessed at the margin would require more fertilizer and/or irrigation (read, more energy inputs) to produce commercially optimal yields. The increased energy inputs required for the new cropland will be so great that the author believes that the president’s plan for wildly expanding ethanol production would actually make greenhouse gas emissions higher than they are at present.

For a more robust discussion of this automotive snake oil, see the cover story I co-authored — titled, “The Ethanol Illusion” — in the most recent issue of the Milken Review. An even more comprehensive beating, in the form of a full Policy Analysis, will soon be published by Cato.

By the way, I live to debate this topic. If anyone wants to sponsor an event featuring me and the ethanol shyster of your choice, just drop me a line. Any time, any place, any where.

Why, Here’s the Myth Now!

Yesterday, the Center on Education Policy (CEP) released Why We Still Need Public Schools: Public Education for the Common Good, which argues that American public schooling is a unifying force that has taken diverse people and made them one, as well as taught them to be good, democratic citizens. 

CEP is wrong, but the timing of their report couldn’t have been better. It just so happens that two days earlier Cato released Why We Fight: How Public Schools Cause Social Conflict, which directly addresses CEP’s main points. 

Why We Fight itemizes nearly 150 divisive, political battles forced by public schooling in the 2005–06 school year. The paper dispels many of the historical myths about unity through public schooling that are contained in both CEP’s report and the common rhetoric of government schooling advocates.

The conclusions of Why We Fight couldn’t be more clear: Because public schooling forces all of America’s diverse peoples to support a single system of education, but allows only those groups that can accumulate the most political power to control the schools, the people are forced into constant conflict to make the schools reflect their values and desires. From battles over evolution, to dress codes, to student speech, to multiculturalism, to the place of religion in the schools, public schooling has been a constant battleground, not the gentle flame beneath the American melting pot described in CEP’s report. 

In addition to tackling the unity myth, Why We Fight finds no evidence that we need public schools to teach children how to be good citizens. Indeed, it reports that as public schooling became more entrenched and widespread over the decades, such measures of civic involvement as voting rates in presidential elections plummeted. It also shows that students in private schools tend to have greater civic knowledge than their public school peers, and are more tolerant of people different from themselves. 

In the final analysis, only where unity has already existed has public schooling avoided divisive conflict, and where there’s been great diversity, public schooling has produced great conflict. Thankfully, a truly unifying force has overcome public schooling: the shared desire for freedom among the millions of people who have landed on America’s shores, and a shared recognition that to succeed in life, diverse people must voluntarily work together. In other words, we are united in spite of coercive public schooling, not because of it. 

Tax Competition Pushes States to Improve Tax Policy

Thanks to the mobility of labor and capital, state politicians face pressure to lower tax rates and reform tax systems. Indeed, the Wall Street Journal explains that the nine states without income taxes soon may have company, especially since it is increasingly apparent that no-tax states are growing much faster than states that have adopted the punitive levy:

In Georgia, Missouri, and South Carolina, governors and state legislatures are drafting serious proposals to repeal their income taxes to promote economic development. St. Louis, one of America’s most distressed cities, may overturn its wage/income tax as a way to spur urban revival. And in Michigan, the legislature is in the last stages of phasing out its hated business income tax — the most onerous in the land.

“States are now in a ferocious competition to attract jobs and businesses,” says economist Arthur Laffer, who is advising several governors and legislators on the issue, “and one of the best ways to win this race is to abolish the state income tax.”

…The idea of financing state services without an income tax is hardly radical. Nine states today — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming — manage well without one. With a few exceptions, the non-income tax states are America’s most prosperous. Meanwhile, the high income tax states, which tend to be congregated in the Northeast, keep surrendering jobs, people, and voters to the South and West.

State lawmakers also seem to have learned from two of the most recent states to adopt an income tax: New Jersey and Connecticut. As recently as 1965 New Jersey had neither an income nor sales tax, but managed to balance its budget every year. Now it has both taxes — its income tax is the 5th highest in the nation — but the state is facing what Stateline.org calls a “staggering budget deficit.” Allied Van Lines reports that the Garden State is now one of the leading places for people to flee.

The latest state to adopt an income tax was Connecticut in 1991, but a new report by the Yankee Institute reveals that the tax has been a calamity. The state has ranked last in employment growth since 1991, losing 240,000 of its native born citizens between 1991–2002. No other state has since enacted an income tax, and lawmakers in Georgia, Missouri, and South Carolina say Connecticut is now the model for how not to run a state economy.